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Basic economics – not regulation – ended the Energy East pipeline

BENJAMIN DACHIS

Contributed to The Globe and Mail

Published October 5, 2017Updated October 5, 2017

Benjamin Dachis is associate director of research at the C.D. Howe Institute.

TransCanada Corp. announced on Thursday that it would not proceed with its Energy East proposal to ship Western Canadian oil to Eastern Canada. Widely thought to have been felled by overzealous regulators, in truth the king of Canadian pipeline projects was dethroned by the simple loss of its business case. Happily for Western Canada, natural gas looks to return to the throne of Canadian energy.

The case for Energy East was weakened by the decline in global oil prices since 2014. Between then and now, the forecast for Western Canadian oil production has fallen precipitously. According to data from the University of Alberta's Andrew Leach, the Canadian Association of Petroleum Producer's forecast for production by 2030 is down by more than two million barrels a day.

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As the largest of Canadian pipeline proposals, Energy East alone was to represent about 1.1 million barrels a day of shipping capacity from Western Canada. If TransCanada's Keystone XL pipeline gets built – a prospect looking increasingly likely every day – along with Kinder Morgan's pipeline expansion to the West Coast and improvements along the Enbridge system, there would likely be excess pipeline capacity from Western Canada.

With more pipelines fighting over less oil to ship, TransCanada likely saw it would be cannibalizing Keystone XL. Every company would make the same decision: better to make money on one project than lose money on two.

Energy East's final toppling arose from a recent decision by the National Energy Board (NEB), but not for the reason you think.

Many will blame the travails that the NEB went through earlier this year. First, there were protests at hearings. Then, the NEB restarted the process from scratch after some members were accused of bias. That certainly slowed the project.

Others will blame the decision by the NEB to include upstream greenhouse gas emissions in its review of the social cost of the pipeline. Rejecting a pipeline on greenhouse gas grounds could have exceeded the constitutional grounds for federal environmental reviews and intruded into provincial jurisdiction. Counting upstream greenhouse gases against an inter-provincial pipeline would be economically costly without actually resulting in a reduction of emissions.

In fact, the plan's most likely cause of death was an NEB hearing a few weeks ago that resuscitated the economics of an old alternative. The majority of the planned Energy East route to take Western Canadian oil east relied on converting much of the existing infrastructure that has historically shipped natural gas to Ontario.

The pipelines that Energy East was to convert for oil shipping have been transporting natural gas east from Western Canada since the 1950s, and the NEB has been regulating the price of those shipments. Declining natural gas prices as a result of new, cheaper methods of production outside Western Canada meant that shipping the fuel across the continent at the rates set by the NEB wasn't economical.

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Less gas going east meant that the pipeline wasn't running at full capacity. TransCanada then had the bright idea to use the existing pipeline – presumably making it easier to build and get public support – to transport oil instead of gas.

The economics of that plan all changed in late September. The NEB approved a new price plan between TransCanada and natural gas producers that slashed the price that producers paid to send the gas to Ontario. The new price is less than half the old price. Producers in Western Canada, home of some of the most prolific and low-cost natural gas sources in North America, have signed up in droves for the new deal. The new low shipping cost will make western natural gas competitive in the east once again.

The end of the Energy East pipeline doesn't mean the end of Western Canadian oil production. Its cancellation was a symptom – not the key cause – of reduced future oil production.

Although the king of Canadian energy infrastructure projects may be dead, the old regime of Western Canadian natural gas will be restored in its place.

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